Discuss About The Investment Analysis Portfolio Management?
Emerging economies refers to those economies of countries that are towards becoming advance though. Two examples of these countries are China and India being the largest emerging market economies in the world. Emerging economies offers some of the best business opportunities since these countries have large economies with the ability to advance. The two countries have different and varied economic and environmental condition that influences investment. Both China and India have registered different economic growth that has a direct or indirect effect on the return on capital invested. The robust economy that is supported by large population size and good demography is vital for foreign investors willing to invest in the two countries. The following paper gives the investment analysis and portfolio management within two emerging economies of China and India.
The political environment in China has made limited progress in economic reforms. The current Communist Party show limited economic reforms that hinder both economic growth and trade with the economic growth currently standing at 6.9%. This implies that since the party came into power there are structural problems that are also tied to financial regulatory inefficiencies jeopardizing the financial sector (Bode, Kane & Marcus 2005). Furthermore, the influence of Communist Party in the rule of law has reduced the dependence on the rule of law pointing towards economic uncertainty growth giving integrity of Government Integrity 41.6. This is due to the vulnerability of the legal system that controls the trade regulation to the political influence of Communist Party hence judicial effectiveness 60.7 (Thorp 2010). Failure to reform the economic and financial sector has also resulted in debt either in the household, corporate, or the government. This political problem leaves the legitimacy of the Communist Party government in doubt since it fails to improve the living standards of the people as they promised when coming to power.
The government of India, on the other hand, is a democratically stable with annual growth of 7%. Bharatiya Janata Party has performed since its coming into power in 2014 with the reinvigorating economy policy. This is coupled with technological advancement creating a clear distinction between the extremely wealthy and poor that exists in the Indian economy. In addition, the economic policies that are developed by Bharatiya Janata Party have facilitated the struggle in the country’s diverse population. The government of India is currently developing ties with other countries such as the USA giving the current good score in terms of foreign relations. Continuous pressure has made the judicial system in the country to be independent with good adherence to the rule of law. The government integrity, therefore, remains Government Integrity 44.3 due to understaffed of the judiciary with Judicial Effectiveness 44.4.
The Indian open market gives the value of export and import leveling at 49% of GDP. According to reff, the average tariff that is applied to balance of trade currently is 6.2% with state enterprise distorting the economy of India. Moreover, the government banking institutions are the major players in the economy. These institutions also dominate the capital market sector despite the liberalization of market efforts. The trade freedom is on the rise and, currently stands at 72.6% giving investment freedom and financial freedom equal rating of 40.0. India’s interest rate, on the other hand, is currently 8.1% p.a. this interest rate was made effective from the financial year 2016/2017.
China economy is improving in terms of interest rates with the adoption of short-term interest rate that has been witnessed in the recent times in the country. Some institution such as Shanghai Interbank current interest rate stands at 4.42% superseding the PBOC’s of 4.35%. This is positive given the 4.85% interest rate recorded in June 2015. The trend has been on the decline since 1996 where the country recorded an interest rate of 10.98% and was the highest. For the last, two years the interest rate has stabilized at 4.35% since October 2015 (Jalil, Feridun & Ying 2010, pp. 189-195).
The India’s State Bank of India (SBI) has the mandate to set the interest rate throughout the country. The fixed deposits interest rate is currently set at 5.25%pa to 7.25%pa. Moreover, fixed deposit is set differently depending on the period of time for instance 60,90, and 120 days have fixed deposit rate of 6.5% pa while 6 months attract fixed deposit rate of 6.75% pa. On the higher side, duration of 9 months comes with a fixed deposit rate of 7% pa (Echeverri-Gent 2002, pp. 19–53).
China is a major player in the global trade platform with its economic policies influencing the much global economy. According to Bose and Jalal (2011), China is at the epicenter of the Asian trade making the country Yuan have influence in the exchange rate within the global economy. The Chinese currency is currently stabilizing with 1 Yuan trading at 0.15 US Dollar in the international market. This gives the currently country stable foreign exchange rate in the international trade. Indian rupee is the official currency of India (INR) and is one of the popular currencies in the USD to INR rate. The current inflation rate is 5.20% and, currently, 1 Indian rupee is equivalent to 0.016 US Dollar (Bode, Kane & Marcus 2005).
Employment and unemployment rates
The country’s population of 1,374.62m offers cheap labor hence a contributing factor in the economic growth witnessed over the past years. The unemployment rate currently is 4.1% leading to shift as the economic rate stagnates. The country’s economic growth slowdown since and dynamically influences with the country's demography. The large population gives the country cheap labor and out of 765.31 million economically viable persons in China 753.21 million are currently employed totaling to 70.8 %. Statistics dating back to 2016 shows that 27.7 % of the workforce are employed in agriculture, 28.8 % in industry and 43.5 % in services (What Investment 2015).
India has seen its rate of unemployment decreasing since 2012 where the unemployment rate was 5.20% and in 2013 the rate decline to 4.90%. The decrease in the unemployment rate has shown positive with the highest unemployment rate being in 2009 where the rate was 9.40%. the employment rate is also expected to increase to The composition of the employment and unemployment rate and population can be well described by Www.Tradingeconomics.Com (2017).
As an emerging, economies China has attracted numerous industries touching almost every sector of the country’s economy. Though there are many different industries in China, three major industries remain the backbone of the Chinese economy. These three industries are manufacturing, agriculture and telecommunication (Nofsinger 2008). These industries have made China be the second largest importer and the largest exporter throughout the world. The three industrial sectors account for 40% of the country’s GDP and making China the fastest growing market. In the manufacturing sector, for instance, the country remains the largest manufacturer and exporter than any other country. Some major products are textiles, aluminum, cement, electronics, rail cars, steel, chemicals, ships, toys, iron, aircraft and many other products. Agricultural sectors produce millet, wheat, soybeans, tobacco, oilseeds, peanuts, pork, corn, fish, tea, and potatoes. Telecommunication industry is dominated by Microsoft and IBM coupled with increase cloud computing (Gitman & Joehnk 2008).
India economy is the 9th largest economy in the world that and one of the first growing economies. India is also coupling China as the two largest emerging economies with a significant role in the global economy. Similar to China, India is also dominated by three main industries forming the economy and these are manufacturing, service and agricultural industries (Trading Economics 2017). Manufacturing industries currently account for 27% while service industries account for 57% of the GDP. Some of the top industries are textile industry, tourism, chemical industry, transport, telecommunication, banking, retailing, and agriculture and real estate industries. The largest industry in India remains retailing and wholesale industry accounting for 23% of the GDP followed by agriculture at 15.7% (Dev, & Rao 2009).
According to Xiangyan (2015), China current account gives a surplus of $196.4 billion declining by 14% registered in 2015 where the country had a surplus of $494.1 billion in goods-trade. Service trade, on the other hand, had a deficit of $244.2 billion, translating to 12 % within a year. In the capital and financial account, a total surplus of $26.3 billion was witnessed in 20016 with a deficit of $300 million recorded in the capital account giving a deficit of $417 billion within the non-reserve financial account. Therefore, Chinese authorities indicate that it is expected that cross-border capital movement will gradually become balanced before the end of the year (Arnold 2010).
India current account deficit has been narrowing the trade gap and therefore the providing further support for the rupee. In the second quarter of the year, the trade deficit has widened from $13.24 billion to $13.84 billion giving an export rise of 8.3% while import also rises with 33%. In this last quarter, the gap is $7.9 billion representing 1.4 % of GDP but higher than the $0.3 billion in the same quarter in the previous year translating to 0.1 % of GDP (Bloomberg 2017).
Performance of major assets
Assets performance in China has generally increased since 2016 with a high return on built assets. The overall high return on assets comes as a result of economic growth based on its built assets. In 2016 the built assets register high return of 52.9% of GDP totaling to 10.4tn. The growth of assets in the China’s market is expected to rise by 6.3% annually for the next five years to reach the climax of $17.85 billion in 2021 (China Daily 2017).
Performance of fixed interest
Throughout the third quarter of 2016 the financial market has stabilized with the total turnover reaching RMB 202.8 trillion according to People’s Bank of China (PBOC) reflecting a year on year increase of 41.7% (Tsui, et al 2017). In the final quarter, the currency total turnover reached RMB 59.3 trillion recording an increase of 29.5% YoY and 19.9% decrease in a month on month. To this effect, the Chinese government continues to adopt policies that aim at making the economy to steady hence the yield curve fluctuate for all bond in some degree. Interbank bond market, on the other hand, registered YoY increase of 46.2% totaling to RMB 36.4 trillion while RMB 11.2 trillion turnovers were registered towards the end of the fourth quarter of 2016 representing a YoY increase of 32.0% or 10.8% decrease month on month (Tang 2010, pp. 52–53). Commodity price index also registered high turnover in the third quarter as compared to the previous year. This was represented by 14.1% as compared to 33.1% experienced at the beginning of the year. Property assets performance has total to RMB 7.4598 trillion which a represent YoY increase of 5.8% and this was without any impact on the property price. Of this 27.1% increase was recorded on the residential property assets only. Commodity housing property assets have totaled to RMB 8.0208 trillion, representing a YoY increase of 41.3%, while sales of residential property assets increased by 43.2%. The stock performance has been equally good with joint-stock commercial banks’ liabilities growing a little bit faster and GYB registered an increase of 36.55% being the highest followed by BON that has 27.71% and CMBC with 25.88%. The increase can be attributed to increases in customer deposit thereby increasing bond payable. In the third quarter of 2016, customer deposit reached RMB 91.12 trillion that represents 9% increase when compared to the previous year (Sinha 2004, pp 25–63).
India is an investment hub that attracts many investors throughout the globe due to its varied investment environment characterized by vigorous economic reforms. The stock has been on the gaining track that can be traced for the last 10 years at the rate of 142% as evident by Bombay Stock Exchange. Modi's current government has come up with a strategy on the business policies that aim to make the country’s GDP reach 25% by 2020. Therefore, the country is most likely to grow as result of boost manufacturing sector that aim at reaching 25% GDP. This is higher given that in 2013, manufacturing was contributing nearly 13% of the GDP (What Investment 2015).
Advantages of establishing funds in the emerging economies China and India
Establishing a country fund of investments offered by China has three main advantages that can be deduced from the economic situation in the country. Firstly, benefits of economies of scale that result from the collective investment. China is one of the countries with robust economic factors that favour massive investment. As revealed in the continuous increase in return on assets, pooling resources in China open gate way for profitability from investment (Jalil & Feridun 2011, pp. 284-291). This is different in the case of India that has varied business environment that is more riskier than China. Secondly, there is the possibility of diversifying assets as it point towards improvement. The countries assets return shows projection of profit that may the result in a good portfolio for the investment. The economic growth that is evident by various policies and strategies the country has open the market for investment and should be included in their portfolio. Thirdly, establishing a country fund of investment mostly in their portfolio draw pool of investment managers that manage the investment reduces risk and maximizing return on investment (Xiangyan 2015).
Disadvantages of establishing fund investment in China and India
Establishing a country fund of investment in China and India is also coupled with some disadvantages. Firstly, the cost is most likely to be high given the types of the portfolio that are in the country especially assets. The investment will require the investors to hire managers that have the capability to monitor the changes in the value of the assets depending on the market fluctuation (Hsu & Hasmath 2013, p. 124). The costly nature of investment applies to both China and India as both countries share many business environmental factors. Secondly, diversification of investments follows the prevailing assets in the market and therefore restricts investors to certain market characteristics giving investor limited choice. The current prevailing market return on investment in China shows is advantageous than India given the regulatory policies in an India are a striker (Investment Options 2017). Finally, collective investment reduces the individual right over the investment since the pool of investors controls of the investment.
In conclusion, based on the investment analysis and portfolio management analysis the two emerging economies of India and China presents different market environment for investment. Based on the economic growth China remains the good country to invest in its policies and marketing environment favor foreign investment. Over the past years China has experienced an increasing return on the capital investment, especially on the assets. For instance, over the third quarter of the year 2016 a witnessed increase of 41.7% in the total turnover as compared to the previous year. This is also true with fixed assets such as properties that equally registered increase without an increase in prices of property. On contrary, an India has an environment that is characterized by a high tax rate that is not consistent with the profitability of the asset.
China and India are two large emerging economies and based on the investment analysis when establishing new investment the China has shown to be the best and this is due to wider market opportunity present in China. The only challenge remain is saturation of the country's growth that hinders high return in some investment sector such as property assets investment. Therefore, there is fall in demand for most assets in China as compared to India whose economy is slowly picking up. I recommend investing in India for those already established investments. This is due to the continuous growth characterized by the new market characteristic that may pose a different financial risk. A good portfolio management is required especially in China where the market is mostly saturated with many investors (Hatemi & El-Khatib 2014, pp 141–143).
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